Sex and money underpin accusations by Chinese officials against 22 GlaxoSmithKline (GSK) employees and an unknown number of doctors detained in China over the past month. Misdeeds include funneling of up to RMB 3 billion ($489 million) to travel agents, using the money to bribe doctors and officials or “cater to their pleasures,” as China’s official Xinhua news agency delicately reported, as well as inflating drug prices and committing tax fraud.

GSK has since promised to cooperate fully with Chinese investigators, with an embarrassed CEO Sir Andrew Witty calling the allegations “deeply disappointing.” China sales accounts for some 3% of revenues for GSK, one of about 60 biopharmas under investigation for pricing policies; two AstraZeneca staffers have also been detained, while UCB has confirmed its employees have been questioned.

However, the GSK scandal is one of two formidable challenges to biopharma’s growth in China. The other is the country’s three-year-old healthcare reform effort, which includes caps and reductions of drug prices that the state recently extended to hundreds of additional medicines.

Despite those challenges, GSK is unlikely to scale back on its Chinese presence. The company is still talking to potential domestic vaccine partners, since healthcare reform is expected to mean more frequent patient immunization. Then, there’s the bottom line. GSK drug and vaccines sales in China last year jumped to £759 million (about $1.2 billion), up 17% from 2011, and the company has been on pace to exceed that, maintaining double-digit quarterly growth and generating £411 million ($626 million) in the first half of 2012. Now, GSK is preparing investors to expect less.

“Clearly, we are likely to see some impact to our performance in China as a result of the current investigation, but it is too early to quantify the extent of this,” GSK said in a July 24 statement by Sir Andrew accompanying GSK’s Q2 results.

David Jiang, Ph.D., managing director of BIOCOM China Consulting, told GEN he expects that the scandal involving GSK will compel it and other multinational biopharmas to put patients first by enforcing stricter ethical standards and scrutinizing Chinese operations much more closely. As obvious a business-101 move as that sounds, Sir Andrew has said top GSK executives were unaware of employee actions in China.

“If the Chinese government starts to crack down on other multinationals, but not the Chinese pharmaceutical companies, then I think that’s going to have a severe impact on the way multinationals operate in China, and think about their new investment in the Chinese market. But if it were only isolated to GSK, I think the impact is limited,” Dr. Jiang said.

Sex, Drugs, and Bribery

Why pursue GSK now? China appears eager to deter healthcare providers from profiting from high drug prices—an unintended consequence of the government’s low-cost hospital service mandate. China also senses opportunity to duplicate its victory over Nestle, which in early July rolled back infant formula prices an average 11% after a state antimonopoly investigation.

“I would be quite surprised if the case changes the underlying rationale for investing in research facilities in China,” Arthur A. Daemmrich, Ph.D., an assistant professor at Harvard Business School and visiting assistant professor at China Europe International Business School, told GEN. “It does speak to the challenge for multinational corporations of a business environment in which the underlying operating norms are in flux. So whereas the rules and regulations may be reasonably clear, business practices are tricky.”

How tricky? China says some GSK employees “established good personal relations with doctors by catering to their pleasures or offering them money, in order to make them prescribe more drugs,” according to Xinhua.

“Some executives gave clear directives to the sales department to offer bribes to doctors or opportunities to attend academic conferences,” some of which were fake, Xinhua reported, adding that GSK representatives offered bribes of 10 to 20 yuan ($1.60 to $3.20) to doctors who earned a 7%–10% cut from sales of GSK drugs they prescribed.

Xinhua cited a 35-year-old GSK rep surnamed Wang, who “said she entered doctors' offices to act as their assistant, and meet their needs as much as possible, even their sexual desires.” She worked for a source of the Xinhua report, a GSK regional sales manager surnamed Li who sold respiratory drugs to more than 10 hospitals in Zhengzhou.

“The government officials at the local or regional level where they’re buying drugs are basically low-paid government officials,” Richard (Erik) M. Gordon, director of the ZEAL (Zell Entrepreneurship and Law) Program and a professor from practice at the University of Michigan Law School, told GEN. “These low-paid guys are seeing everybody else get rich, but they’re not getting rich. Whenever you have that situation in the country, what’s their one way of making a little money? Bribery.”

“Even if headquarters says, ‘Do not bribe anybody, it’s against our policy,’ if you’re doing any sales in China, somebody out in the field is defying your policy and doing it, and putting you in great danger,” said Gordon, who is also clinical assistant professor at U-M’s Stephen M. Ross School of Business. “That’s one peculiar disincentive in China. The second is, you know the real game there is the transfer of your know-how to Chinese companies.”

Biopharma’s Future in China

Jim J. Zhang, Ph.D., president and managing director of JZMed, which provides outsourcing to Western biopharmas expanding into China, told GEN that long-term, he doesn’t see the GSK revelations affecting the China strategies of other multinational biopharmas: “They want a market, and the Chinese pharmaceutical market is going to grow fast; there’s almost no doubt, even though it’s going to slow down a little bit in the near future.”

A Deloitte report earlier this year quantifies China’s pharmaceutical market at $69.7 billion, third-largest in the world and projected to reach second-largest or $120 billion by 2016. One key reason: Healthcare reform more than doubled the percentage of Chinese with at least some insurance coverage, from 43% in 2006, when the market was just $20 billion, to 95% or 700 million people last year.

About three-quarters (70% to 75%) of sales revenue comes from branded drugs mostly sold by Western biopharmas, according to Economist Intelligence Unit data cited by Deloitte. Yet most of the biopharma market consists of prescription or over-the-counter generic drugs whose prices are fixed and included in the government’s list of “essential” medicines that must be available to the public at all times, affordably, and at adequate amounts.

China’s government expanded that list in March from about 300 to 520 drugs, and has talked about listing 800-plus drugs someday. Expanding the list is one way Beijing is keeping prices down. Another is the one or two reductions in drug prices mandated each year by the central government, which has repeatedly urged provincial and municipal governments to contain medicine costs.

“Policymakers in China are confronted by a core decision in healthcare reform between the attraction of managing costs (though use of generics and other price control mechanisms) and supporting research-oriented industries that want patent protection and high returns,” Dr. Daemmrich noted.

Since healthcare reform was launched in 2008, China has tried to satisfy both its population by containing costs, and industry by championing growth; the current Five-Year Plan targets biotech as one of seven strategic sectors for increased state investment. Until now, companies have largely accepted the price constraints given the size and sharp growth of the Chinese market. Once that slows, biopharmas will prove less willing to accept state-capped or -cut prices, creating opportunity for price reduction based on market forces such as competition.

The state encourages other provinces to follow Anhui, which buys drugs in bulk from the lowest bidder capable of supplying medicines. China credits the “Anhui model” with lowering drug prices up to 90%—cash that many domestic companies recouped last year by cutting corners on manufacturing. If China’s serious about stamping out biopharma corruption, it will have to root it out within its home-grown industry as energetically as it has lately against GSK.

What long-term effect will the GSK scandal have on the biopharma industry in China?

Readers' Comments

Posted 08/02/2013 by Stephen Porter

The authors and consultants/contributors got this half right; the power struggle between Xi Jingping's new people and the old guard and new reformers is the root cause of this Fraud crack down. Look into the Hu brothers and Lin Ming and the struggle between the conservative hardline Maoist and the liberal reformers.Then add the SOE pharma crowd who are not enjoying the same ROI as the Western Multinational Pharmas because their product are largely inferior and low priced.

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